If your kids have completed college or you’ve paid off your mortgage, you might be wondering if now’s the time to cash out your whole life insurance policy — and you might be right. Taking the cash value from your whole life insurance is a big decision and can have a lasting impact on your financial future. We’ll help you weigh the benefits and drawbacks of cashing in your whole life insurance policy.
Face Value Versus Cash Value
Making this decision starts with understanding how whole life insurance works. A whole life insurance policy has two components. The first is the face value, or the amount that will be paid to your beneficiaries when you die. The second is the cash value. Your cash value is a savings account that’s funded by a portion of your premiums. When you cash out a whole life insurance policy, you are not getting back your full premium contributions; you will receive the full cash value of the policy.
How to Access Cash From Your Whole Life Insurance Policy
Likely, the longer you’ve owned your whole life policy, the larger your cash value will be and the more options you’ll have for receiving a cash payout. The cash value of your life insurance policy offers you the opportunity to access cash accumulations within the policy through a surrender of the policy, withdrawals or loans. You can even use the cash value to pay for premiums. Below, we outline these options and what they may mean for your situation.
If you’ve had your policy in force for a few years and it has accumulated some cash value, you can cancel the policy and take the surrender value in a cash payment. By surrendering your policy, you are giving up the insurance policy and, in return, you’ll receive the cash value less any fees. When you cancel your policy, your heirs will receive nothing from the policy when you die. Although surrendering your policy might get you the cash you need, it should be a last resort unless you have adequate life insurance coverage in place elsewhere.
If you still need your life insurance policy, you have other options to withdraw cash and keep your life insurance policy in place: withdrawals, loans and premium payment are all options you should consider.
Generally, you can withdraw a limited amount of cash from your whole life insurance policy. In fact, a cash-value withdrawal up to your policy basis, which is the amount of premiums you’ve paid into the policy, is typically non-taxable. Any withdrawals that exceed your basis, meaning you’re dipping into gains, will be taxed at your ordinary income rate. Your death benefit will be reduced based on the amount you withdraw.
A cash withdrawal shouldn’t be taken lightly. Life is unpredictable, and removing any cash from your life insurance policy may leave you vulnerable to life’s uncertainties.
Most cash-value policies allow you to borrow against your policy with a loan. However, you won’t be borrowing against your policy. Instead, you’ll be borrowing money from the issuer and using your policy as collateral. Depending on the terms of your policy, the loan might be subject to interest. Unless you pay the interest out of pocket, it will be added to your loan balance. If you don’t repay the loan or only pay a portion of it back, the balance of your remaining loan would be deducted from your death benefit. There will also be a maximum loan amount you can receive from your policy; talk with your local Farm Bureau agent to find out the maximum loan amount you can receive.
If you end up short on cash and are having a difficult time continuing to pay your whole life insurance premium, you may be able to stop paying the premium out of pocket, and, instead, use the cash value of your policy to cover the premium.
If you decide to cash out your whole life insurance policy, don’t risk going without coverage. Farm Bureau offers a range of life insurance products to meet your needs, including term life insurance. Talk to your Farm Bureau agent to create a plan that’s right for you.